A lot is written about S&OP, Sales & Operations Planning, and I will not resume it here, but S&OP only goes as far. Fundamentally what COE's are confronted with is balancing supply and demand to maximize revenues while delighting customers. To achieve that they have trade-offs make, and these should be made with financials in mind. This is often overlooked in the S&OP process.
Identifying the products with the biggest margins and the customers contributing most of the profit are often not easy as the relevant information is not available. So, building an infrastructure to collect the information is critical for CEO's to be able to truly manage the trade-offs between supply and demand. This is often forgotten in the S&OP process.
Collecting that information within the four walls of the company increasingly become insufficient as an ever growing percentage of costs are managed by other partners in the supply chain. Companies forget that, regardless of where in the supply chain inventory is located, the consumer (the final customer) will have to pay for that inventory or somebody is losing money and will eventually go bankrupt.
In the current environment, where most companies have over capacity, this may not look like a high priority investment area. I actually disagree with that statement as developing such environment not only allows the trade off decision process, but also serves as a key source for lean supply chain activities, and as cost reduction is high on companies agendas these days, one definitely does not want to miss that.
AMR Research developed a concept, called DDSN, Demand Driven Supply Networks , which serves as a base for developing such cross-enterprise infrastructure providing supply chain visibility and trade off management. Developing such environment is an on-going process, starting with the identification of the strategic partners in the value-chain.
A partner can be strategic because he provides a critical component/ingredient, performs a critical task in the manufacturing service, or delivers a key service in logistics or distribution. Identifying these partners is important, as much time and effort will be spent in helping them understand the importance and benefits of sharing data. Once the appropriate level of trust has been developed and the partner understands the advantage he can gain from sharing information, the sharing mechanism needs to be agreed upon and developed. Multiple approaches are possible, starting from simple websites, through using public or private hubs, to the use of the Cloud as a mechanism to consolidate information.
Our experience has demonstrated that in the first phases, the least the partner has to invest, the easier it is for him to agree on becoming part of the integrated eco-system.
Once the chosen approach has been worked out with the strategic partners, others should be included moving forward. It becomes easier to convince them because one can reference the strategic ones.
The technology exists today; it is the process of convincing partners that is the difficult part. But once the data can be gathered, there is a great advantage not just to see what is happening at any given moment in time, but also to look at how things evolve to increase the level of understanding. And here is where our trade-off is coming in again. Understanding the capacities and components/ingredients available, facilitates the balancing of the supply side, while having access to the finished goods inventories in the distribution chain as well as the financial figures on product and customer profitability, facilitates the trade-off process immensely, and will ultimately increase the margins of the company. Now, the major pitfall to avoid is keeping all the additional profits gained in the eco-system without sharing any with partners. Keeping the magic "win-win" concept in mind helps building loyalty, which will often result in partner suggestions for increased benefits. And that is how the eco-system continuously improves.
A couple weeks ago a question was raised about what the implications were for IT when a company was transforming from a manufacturer to a brand owner. This is actually a very interesting question and I will try to share with you my response at the time.
It goes without saying that a manufacturer has control over at least a portion of the manufacturing process of its products. Having a brand often means it includes the final assembly (word to be taken here in the widest sense of the term). Customer demand is consolidated within the company and the demand supply matching involves operations that are within the control of the company. Strategic buffer stocks can be established to shield the company from potential supplier shortages or other issues, and as such the S&OP process can happen within the full control of the company. The ultimate example of this was Henry Ford's Rouge plant where ore, coal, rubber and timber entered, while the Ford T rolled of the line. And as the well known quote says, "You can have it in any color as long as it is black".
By outsourcing manufacturing, and I should probably say final manufacturing, this control is fundamentally broken. The brand owner transforms himself from a manufacturer to an "orchestrator", in the sense that it is now his responsibility to organize what happens in other companies. This has as effect two things:
- First, he does no longer have all information in its own hands, and depends on others to provide that information
- Second, he cannot take decisions directly as he needs to coordinate with outsourcers and suppliers
Maintaining an efficient Supply/Demand matching in such environment puts a burden on IT. Indeed, a very close collaboration is required with the outsourcer to ensure production capacity, inventory, availability of appropriate skills etc. are known and can be taken into account when decisions need to be made. Unfortunately, in many situations, the relationship between the supplier and the customer are rather tense resulting from thorough purchasing negotiations. With the low prices agreed upon, the outsourcer is looking for smooth and continuous operations, not for disruptions. On the other hand, the brand owner needs those to ensure demand is met.
It is critical for a successful manufacturing outsourcing that a trustworthy relationship is established between the partners and that information flows easily between them. This is possible if the relationship is seen as a "win-win" one by both parties. Where this is the responsibility of the Supply Chain or Manufacturing team, the IT department needs to be available to integrate the information coming from the outsourcer within its own system to provide management the data for the S&OP process.
Such approach requires a fundamental change in the way the company sees its suppliers and approaches collaboration. In a following post we will review how the integration can take place and what needs to be done to achieve success.
Obviously, sharing production data is not the only area to look into when outsourcing manufacturing, and we will look at other aspects in future posts also.